With any type of investment, a clear exit strategy is one of the most important things to think about, and unfortunately, it's one of the most overlooked pieces of an investment strategy. Many times, when faced with a "can't miss" opportunity, an investor can get wrapped up in the excitement, forgetting to plan out their exit strategy BEFORE they invest. What happens? A long-term, financially crippling "investment" that leaves you shattered.
It's not enough to say "Oh, in around 3 years or so I'll most likely sell it". Your exit strategy needs to be well-defined in advance, including dates, prices and if possible, potential buyers. A clearly planned exit strategy will be the most valuable tool for your investment. Throughout your investment, your positive cash flow will be your working profit, while your profit-focused exit strategy will make up your big pay day. The two together, properly worked, are your ticket to a great investment.
The look of your exit strategy will vary depending on your investment vehicle, but these four aspects should be considered for most, if not all.
Economic Outlook
Especially these days, the economy is something that must be considered. There are some great buys to be had when the economy is low, but if you want out in 16 months and the market hasn't swung back, your strategy needs to be altered, perhaps allowing more time to account for possible market fluctuations.
Changes in the area
With a real estate investment, possible changes in the area could affect your exit strategy - for the better, if you've done your homework! Is the city upgrading the neighbourhood? Is there a school going in nearby? These are factors that will affect your exit strategy, since you won't want to sell before those upgrades happen. Alternatly, is there a crack-house on the corner? A large grocery store going in next door? These factors will also affect your exit strategy. You must know the area. A new Starbucks on the corner could either increase or decrease the value, based on the values of those who are attracted to the area.
Environmental factors
If you are investing in an area that experiences extreme seasons, you will need to plan your exit strategy around the weather. For example, it's harder to sell a house or a surfing supplies shop in the dead of winter. Typhoon season is not the time to sell your beach-front property, so your exit strategy must be mapped for the proper time of year.
The buzz from other investors
Networking with other savvy investors is vital to planning your exit strategy, particularly if you are planning to sell to another investor. There's no sense buying a business in Pleasantville with the intent to sell if other investors typically despise everything to do with the town. These things are not in books or online - you have to learn them from your peers.
Partnered with positive cash flow, your profit-focused exit strategy will be the big payday, but a poorly-planned or outright ignored exit strategy will be your big downfall. See your escape route BEFORE you begin and you increase your chances of investment success.
